Diversification in farming and agriculture is no longer ‘breaking news’, but a trend that continues as farm and agri-business owners look to generate alternative income, to find new routes to profitability and to involve younger generations in the activities of the business.
However, when contemplating diversification of any kind, it is important to evaluate the tax implications associated with the changes you intend to make.
In this article we cover a just a couple of key tax considerations, that can help you to avoid generating unexpected, or significantly larger, liabilities.
VAT implications of agricultural diversification
Agricultural trade and produce sales, in the traditional sense, are typically zero-rated for VAT. This means that, more often than not, farm businesses find that they are due repayments.
Farm businesses that deviate from the standard farming trade activities should consider how their VAT position might change; for example, whether certain outputs are subject to standard rate, or reduced rate VAT, or indeed VAT exempt.
VAT exempt income may also call for consideration of the partial exemption rules, in respect of recovering input tax. The most common form of exempt income is rent from residential buildings that are not holiday lets.
Some farm businesses opt to set up a new company for some of their trading, but this in itself brings complexities in terms of proving that the income from each entity is wholly independent of the other.
It can be all too easy to wander into new territory in terms of the sales and supplies you are making, without recognising the tax consequences, or requirements in terms of declaring VAT to HMRC.
The accuracy of your VAT returns is key, to ensure that you do not leave yourself vulnerable to investigation, as a result of carelessness, and that the numbers you are working to are correct and of use.
Inheritance Tax reliefs for farming businesses
Agricultural Property Relief (APR)
APR affords Inheritance Tax relief on properties or land (barns, farm cottages and outbuildings, for example) that are used solely for ‘agricultural purposes’ – i.e., growing crops or rearing animals.
Worth noting is that APR can, in some instances, also be available on farmhouses.
When considering whether APR is available, HM Revenue & Customs (HMRC) will consider the uses of the property or land, and how it was occupied prior to the transfer.
Agricultural Property Relief is available at either 100%, or 50%, depending on your circumstances.
Business Property Relief (BPR)
As with APR, BPR is available at 100%, or 50% depending on your circumstances.
BPR reduces the value of a qualifying business, or its assets, when working out how much Inheritance Tax (IHT) has to be paid, since ownership of or share in a business is included in a person’s estate for IHT purposes.
Most diversification ideas do not affect BPR as they are usually qualifying trading activities.
The risky territory is Furnished Holiday Lets (FHLs) where HMRC, in most cases, consider this to be investment activities.
The loss of APR is more worrying as without it there is no tax relief for any of the farmhouse, which can be expensive.
Tax planning advice for the agricultural sector
If diversification is on the horizon for your farm business, take advice from sector specialists before making any big decisions.
It would be remiss to just look at one tax in isolation, which is why we can help you to consider and understand the complete range of tax implications associated with your new idea.
We can also help you to assess the economic viability of an alternative income stream, and ensure you start on the right foot, with the right structure.
In relation to IHT, we are experienced in negotiating with HMRC and have achieved some very successful results.
To talk to one of our specialists in agriculture, who support farming businesses and agri-business owners across the East of England, start the conversation with us today.